Election Violence Shocks in Kenya and its Effect on Foreign Currency Exchange Rates

Davis Bundi Ntwiga

Abstract

Foreign exchange markets are extremely sensitive to rare events. Kenyan election violence of January and February 2008 was such an event. Kenya, an emerging market has information asymmetry, skewed perception and inherent volatility. We analyze the election violence shocks on the foreign currency rates. Daily time series data is from January 2007 to December 2008, for pre-violence, violence and post-violence periods. The GARCH model tests for asymmetry volatility and estimates annual volatility. Friedman nonparametric test was used to test for the significance difference between the countries’ and periods’ volatility. Correlation tests for linear relationship between the countries and each of the three periods under study, while descriptive statistics summarizes the data. The violence period had highest correlation with GARCH parameters indicating a reactive period, showing over reaction in the market. Emerging and developed markets exchange rates correlate negatively but positively amongst themselves, with similar perception on the crisis. The violence shocks adversely affected the exchange rates by increasing asymmetrical volatility, market over reaction and negative perception of the country. Emerging and developed markets differed in perception, information flow and reactions to the violence. Therefore, significant change in economic and political scene is bound to shift the market equilibrium.